Small Caps | Apr 10 2012
– Programmed acquires Turnpoint Group
– Deal will expand Programmed's group maintenance operations
– Should be earnings accretive in FY13
– Stockbroker ratings remain positive on Programmed
By Chris Shaw
Programmed Maintenance Services ((PRG)) has announced it will acquire Turnpoint Group, a provider of landscaping, construction and maintenance services for golf and horse racing courses and major sports stadiums around Australia.
The deal will cost Programmed $9 million, with earn-out incentives worth up to a further $2.9 million included in the transaction, with funds for the deal to come from Programmed's existing debt facilities. Gearing should rise to around 23% from 21% previously on Citi's numbers.
Given Turnpoint delivered earnings before interest and tax of around $3 million in FY11, the deal has been priced at a multiple of 3-4 times trailing earnings. Credit Suisse suggests the deal is a positive in the sense Turnpoint should be easily absorbed into Programmed's existing ground maintenance operations. This supports expectations of a positive earnings outlook for Programmed in general.
As Credit Suisse notes, there is potential for earnings growth from restructuring initiatives, better cost control in more mature businesses and new contract wins in the Marine business in particular. The Turnpoint acquisition adds nicely to this outlook in the broker's view.
The deal is also important from a strategic sense notes Citi, as it signals a return to acquisitions for Programmed. From 2008-2010 Programmed had made a number of purchases but the last was more than two years ago when KLM Group was acquired.
Market estimates suggest Programmed's earnings will receive a boost from the deal by FY13, with Credit Suisse seeing accretion of 2-3% in that year and Macquarie suggesting the boost could be as much as 5%.
On news of the Turnpoint acquisition securities brokers covering Programmed have adjusted earnings estimates. Changes have not been uniform though, as while Credit Suisse has lifted forecasts for FY13 by just under 2.0% Macquarie has actually lowered its numbers by a similar amount.
In Macquarie's view the outlook for Programmed's property maintenance operations will remain patchy, while Marine operations' earnings are expected to flatten out by FY13 as non-Gorgon related work secured in FY12 begins to roll off.
Post its changes, Macquarie is forecasting earnings per share (EPS) for Programmed of 23.4c in FY12 and 27.3c in FY13, while Credit Suisse is forecasting EPS of 25.9c and 31.9c respectively. Consensus EPS estimates according to the FNArena database stand at 25.4c for FY12 and 30.5c for FY13.
Along with adjustments to its earnings estimates, Macquarie has revised its price target for Programmed to $2.71 from $2.56. This lifts the consensus target for the stock to $2.56 from $2.48, with a range of $2.34 to $2.80.
Ratings remain positive, as the FNArena database shows Programmed scores six Buy ratings compared to just one Neutral recommendation. Macquarie's Buy argument is supported by the view earnings for Programmed have based and there will be steady improvement in coming years. Credit Suisse is also attracted to the improving balance sheet at Programmed, seeing this as providing more utility with respect to achieving earnings growth going forward.
Citi on the other hand suggests while the Turnpoint deal is a return to growth via acquisition, investors should not expect this trend will continue as the deal appears to be an opportunistic one rather than the start of a series of acquisitions. Given this, the broker retains a Neutral rating on the stock on valuation grounds.
Shares in Programmed today are weaker in an overall weaker environment. As at 12.45pm the stock was down 7c at $2.43. This compares to a trading range over the past year of 1.63 to $2.59, the current share price implying upside of about 5% relative to the consensus price target in the FNArena database.
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